Question

# Calculating Lessor Payment— Unguaranteed Residual Value Marshall Inc. is negotiating an agreement to lease equipment to...

Calculating Lessor Payment— Unguaranteed Residual Value

Marshall Inc. is negotiating an agreement to lease equipment to a lessee for 5 years. The equipment has a useful life of 8 years. The fair value of the equipment is \$40,000 and the lessor expects a rate of return of 5% on the lease contract. Marshall Inc. expects the equipment to have a fair value of \$15,000 at the end of 5 years; however, the lessee does not guarantee the residual amount. If the first annual payment is required at the commencement of the lease, what fixed lease payment should Marshall Inc. charge in order to earn its expected rate of return on the contract?

Fair Value of Equipment = \$40,000

Present Value of unguaranteed residual value at the end Year 5 = \$15,000 * PVIF (5%, 5)

= \$15,000 * 0.78352

= \$11,752.80

Gross Investment = Fair Value of Equipment \$40,000 - Present Value of Unguaranteed Residual Value \$11,752.80

= \$28,247.20

Fixed lease payment should Marshall Inc. charge in order to earn its expected rate of return on the contract = Gross Investment / Present Value of Annuity Due at 5% for 5 period

= \$28,240 / 4.54608

= \$6,213.53

Note - Present value factors are rounded to 5 decimal places